Banking on Tokyo's Rebound

04/12/2007 12:00 am EST


Yiannis Mostrous

Editor, The Capitalist Times

Yiannis G. Mostrous, editor of The Silk Road Investor, finds a Japanese financial company that should benefit from the recovery in the Japanese economy and the rally in its stock market. 

A month ago, the Bank of Japan (BOJ) raised interest rates from 0.25 percent to 0.5 percent, taking one more step—albeit a small one—down the path of interest rate normalization.

The BOJ was right in raising rates—and should have done this long ago—as the Japanese economy continues to grow, with profits and sales increasing for Japanese corporations, in the process beating market expectations. In addition, unemployment is falling at a low but stable pace, and it should continue doing so.

Normalization of rates increases the alternatives available to the Japanese to use their huge bank deposits (51% of their financial assets) in more productive and profitable ways. Yet many investors don’t think Japan’s deflation years are over, and they’re not buying Japanese stocks.

A prime example: In mid-February, the Topix index (based on share prices of First Section companies on the Tokyo Stock Exchange—Editor) made a 15-year high and hardly anyone noticed. This is in stark contrast to the beginning of 2006, when people couldn’t get enough of Japan. The fact is, Japan is enjoying a secular bull market that commenced in 2003 and in the process has offered returns twice as high as the Standard & Poor’s 500 index.

As the Japanese economy has been improving, Tokyo is gradually becoming one of the best real estate stories globally, as sustained low vacancy (1.5 percent) has resulted in continued rent and land price inflation.

Land prices for high-end commercial properties in Tokyo rose as much as 40 percent last year, and the same trend is occurring in other areas in Japan. At the same time, office rent growth in central Tokyo accelerated in 2006, with the average [annual] rent growth reaching 8% in the city’s five central wards. Furthermore, growing demand for office space is spilling over into peripheral markets.

Fund flows into Japanese real estate continue to grow. Investment banks around the world are putting together private equity funds for investing in Asian real estate, and Japan has become one of the main destinations.

Mizuho Financial Group (NYSE: MFG) is one of Japan’s major financial holding companies. Its main subsidiaries, Mizuho Bank and Mizuho Corporate Bank, are involved in retail and corporate business, respectively.

Mizuho has expanded its branch network and continues to expand its domestic business, concentrating its efforts in retail lending as well as lending to small- to medium-sized firms. Banks will be big beneficiaries of the changes that are taking place in Japan as more people, especially the soon-to-be-retired baby boomers, use some of their retirement benefits to boost their holdings in investment trusts in an effort to improve their retirement years.

Furthermore, as domestic credit growth starts to pick up, banks will be the prime beneficiaries to cash in on that action. Buy MFG below 15. (It traded above $13 on Thursday—Editor.)

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